Can Impact Investing Outperform the Market?

According to a recent article on Forbes.com, a strategy called impact investing has significantly outperformed the returns of the broader financial markets over the past year. Increasingly in vogue in the philanthropy world, impact investing tries to produce profits by specifically considering environmental and social factors when choosing investments.

While the idea of socially responsible investing has been around for a while, the article mentions that this niche has grown significantly in recent years; it now totals more than $2.7 trillion in the U.S. Some of these investment opportunities exist only in private equity, but many are available to the average investor as well. Examples include microfinance and socially responsible investment funds; green energy companies like Evergreen Solar (Nasdaq: ESLR) and Suntech Power (NYSE: STP) ; and even well-known companies like Starbucks (Nasdaq: SBUX) , Whole Foods (NYSE: WFMI) , and Google (Nasdaq: GOOG) that espouse certain socially responsible values.

Along the same lines, Best Buy (NYSE: BBY) recently rolled out a recycling program, after customers said that they preferred to do business with retailers that cared about their communities. The electronics retailer also recently audited its factories of suppliers to make sure they don't exploit workers or pollute the environment.

Now, the argument (if you want to call it that) against being socially responsible is that it's not an effective business strategy, and that business leaders shouldn't be wasting their time with that nonsense. In regards to investing, socially responsible strategies have a bad rap for generating less-than-stellar returns.

But some investors seem to think otherwise -- and some of them have turned their beliefs into profits. What do you think? Is impact investing the strategy of the future, or is it only for those who are willing to sacrifice superior returns?

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

The first is "negative screening," in which investors take social, environmental and humanitarian considerations into account when choosing investments, seeking to avoid those companies or ventures that have a negative impact in these areas. This seems to be the crowd to which the Best Buys, Starbucks and Whole Foods are playing to, at least partially. In as much as consumers of their products care about socially responsible business practices, it makes all the sense in the world for these companies to be socially responsible, even from a purely (long-term) profit-based perspective. I'm sure Whole Foods could turn a temporarily bigger profit by cutting some more socially irresponsible corners, but then it just wouldn't be Whole Foods anymore, and I wouldn't spend my whole paycheck there. The carefully branded images of these companies are made of such considerations, and all companies can siphon off some of the throngs of socially responsible consumers by making their own commitments (good for Best Buy!).

The second category of socially responsible investing is impact investing, per se, in which investors "actively seek to place capital in businesses and funds that can harness the positive power of enterprise." According to GIIN, "This (Impact) investment interest is sparking the emergence of a new industry that operates in the largely uncharted area between philanthropy and a singular focus on profit-maximization."

Now that's just awesome! But of course, the awesomeness says it all: the word philanthropy is in there, and it's not got a singular focus on profit-maximization. Maybe that makes some investors cringe, but if you're not talking about betting the farm and changing your entire investment strategy to impact, then I don't think it should.

Apparently, these investments yield anything from a simple return of principle capital to a better-than market rate of return. Plus, in the long-term, things that are socially responsible are socially useful, and things that are socially useful should theoretically be profitable.

I think having some of your portfolio devoted to such ventures, companies, vehicles, etc. is a good bet. Doing good and making money don't have to be mutually exclusive.

The first is "negative screening," in which investors take social, environmental and humanitarian considerations into account when choosing investments, seeking to avoid those companies or ventures that have a negative impact in these areas. This seems to be the crowd to which the Best Buys, Starbucks and Whole Foods are playing to, at least partially. In as much as consumers of their products care about socially responsible business practices, it makes all the sense in the world for these companies to be socially responsible, even from a purely (long-term) profit-based perspective. I'm sure Whole Foods could turn a temporarily bigger profit by cutting some more socially irresponsible corners, but then it just wouldn't be Whole Foods anymore, and I wouldn't spend my whole paycheck there. The carefully branded images of these companies are made of such considerations, and all companies can siphon off some of the throngs of socially responsible consumers by making their own commitments (good for Best Buy!).

The second category of socially responsible investing is impact investing, per se, in which investors "actively seek to place capital in businesses and funds that can harness the positive power of enterprise." According to GIIN, "This (Impact) investment interest is sparking the emergence of a new industry that operates in the largely uncharted area between philanthropy and a singular focus on profit-maximization."

Now that's just awesome! But of course, the awesomeness says it all: the word philanthropy is in there, and it's not got a singular focus on profit-maximization. Maybe that makes some investors cringe, but if you're not talking about betting the farm and changing your entire investment strategy to impact, then I don't think it should.

Apparently, these investments yield anything from a simple return of principle capital to a better-than market rate of return. Plus, in the long-term, things that are socially responsible are socially useful, and things that are socially useful should theoretically be profitable.

I think having some of your portfolio devoted to such ventures, companies, vehicles, etc. is a good bet. Doing good and making money don't have to be mutually exclusive.

As a consumer I find that I spend a bit more time finding out who I am doing business with. That is to say that if Best Buy is going to recycle and do other socially responsible things, I am more likely to purchase from them. They may be entirely self-serving by doing do so, but result is the same, and I am interested in the result.

Rather than looking at a loss of return because a company spends a bit on responsibility, it may turn out to be a money maker. There are only so many $ to grab and today it all seems to be about taking share. I think we are seeing the consumer be more deliberate about who gets that share.

Retired, we concentrate on value/price. But given two companies with similar products and prices, one of which at least tries to think of society, the latter would get our business if we know about it. Those who are careful in one thing tend to be careful in other things also. Which is one reason dividend-paying companies tend to do just a bit better, no?

Surveys all-over-the-world show that most investors want to invest in ethical companies and don't want their investments being the cause of grief to others.

And since numerous studies show that their is no long-term penalty (to returns) in doing this, the outcome will be investors selecting investments that fit their values. Then since so many of our core values are alike — and are supportive of higher ideals — that in the long run, only companies employing these higher values will truly prosper.

Intuitively makes sense as these companies can reap short-term savings in areas like energy and packaging, while building a reputation for being good corporate citizens, driving consumer and employee loyalty